While things finally appear to be improving in the battered housing market - buyers are crawling off the sidelines and sales are inching upward - the National Association of Home Builders remains hesitant to call a bottom.

"I guess we're just a nervous lot these days. We're just so beat up," said Bernard Markstein, vice president and senior economist of a group limping through the worst downturn in generations. "Evidence is mounting that we're at the bottom."

Thursday, the NAHB/Wells Fargo Housing Market Index showed confidence in the market for newly built, single-family homes climbed two points to 17 out of 100 in July, beating expectations to show the highest reading since September's market turmoil. That's well below the high of 78 reached in December 1998, but more than double January's 8, the lowest recorded since the index's 1985 start.

"We've clearly hit the bottom on the HMI," Markstein said. "It's turning up, but very slowly. The recovery for housing is going to be a long, slow one."

Housing starts, which plunged 80% from the January 2006 peak, have shown modest gains. Inventory is declining slightly - to an average 3.5 unsold, finished units per community, down from four a last month - and cancellation rates are easing as fewer buyers abandon purchase contracts, according to John Burns Real Estate Consulting' s July survey.

But numerous hurdles remain.

"People really want the green shoots to be real and flourishing," said Merrill Ross, an analyst with BGB Securities Inc. "But this is a much larger problem and it's going to take time, nothing but time."

She expects housing starts to remain depressed for two or three years while the 19.1 million current vacant units are "reluctantly absorbed."

Unemployment, meanwhile, is at levels not seen in decades, reducing the pool of potential buyers and increasing the risk of unpaid mortgages. RealtyTrac Thursday released its closely watched foreclosure report, saying filings were reported on more than 336,000 properties in June, the fourth-straight month in which the total topped 300,000.

Barclays Capital, meanwhile, estimates new foreclosures started this year at 3 million, with 2.6 million expected in 2010. That's painful for builders because foreclosures, which can command discounts as high as 60%, pose stiff competition and are lowering appraised values, threatening much needed deals.

California's tax credit of up to $10,000 for buyers of new homes is exhausted, while buyers looking to tap the federal government's tax credit of up to $8,000 for qualified first-time buyers need to ink deals soon. It's unclear if that will be expanded or extended.

Despite such headwinds, the NAHB's index, based on a survey of 484 builders, showed other optimism. The index gauging current sales conditions climbed three points to 17, while traffic of prospective buyers added a point to 14.

"Readings on traffic remain well below the historical average," noted UBS analyst David Goldberg. "We don't expect an improvement until unemployment peaks and the economy shows signs of stabilization, leading to improved buyer confidence."

Sales expectations for the next six months were flat.

The South saw the biggest HMI gain, adding five points to 20. The Northeast gained three to 16, while the Midwest and West were unchanged at 14 and 15.

The report's release gave builder stocks a slight boost. Lennar Corp.'s (LEN) 3.5% gain was the sector's biggest, while the Dow Jones US Home Construction Index recently traded flat. Beazer Homes USA Inc. (BZH) was the biggest decliner, down 1.46%.

-By Dawn Wotapka, Dow Jones Newswires; 212-416-2193; dawn.wotapka@dowjones.com